Mortgage Trends This Week: June 28 - TheStreet

Are mortgage rates on a downward slide to 4.5% — or even 4% — for a 30-year fixed-rate mortgage?

Even one year ago, that would have been considered a comical statement, and the economist who suggested it might have been fitted for a drool bucket and a straitjacket.

But maybe the thought of mortgage rates going to 4.5% or lower isn’t so crazy. Not after mortgage rates fell again last week, and substantially so. According to the BankingMyWay Weekly Mortgage Rate Tracker, the 30-year fixed mortgage rate fell from 4.9% last week to 4.775% this week.

Granted, that’s still a long way off from 4% and that level may never be reached. But it’s only a short slide to a heretofore-unthinkable 4.5% 30-year mortgage rate — it’s only about 28 basis points away.

Only last August, 30-year fixed-mortgage rates topped 5.5%, and it’s been pretty much a steady, downward slide ever since. What’s the deal?

Some economists, like The New York Times’ Paul Krugman, believe low rates are a related to a deflationary spiral that could be with us for a decade (he compares the current rate environment to Japan’s recent “lost decade” that was also fueled by aggressive deflation).

By definition, deflation occurs when asset and consumer prices are in steady decline. While that might seem like manna from heaven to U.S. consumers, who would likely appreciate cheaper prices for goods and services, deflation is not what it might seem at first glance. Normally, a decline in consumer demand means the economy has stopped growing (and may even be in decline) as high unemployment, falling wages and sliding housing and stock portfolio prices combine to grab a slow stranglehold over the economy. Sound familiar?

Economists usually track the U.S. consumer price index for signs of deflation. According to the U.S. Bureau of Labor Statistics, the CPI for May 2010 fell by 0.2%, not a big slide by any means. And most CPI indicators say that consumer prices aren’t in decline just yet, as higher energy prices have kept the broader CPI in check. But if the overall CPI number continues to fall, that could be a major sign that the U.S. economy has fallen back into a deflationary-fueled recession, and potentially a major one.

That’s not the stage we’re at yet, but any economist knows — even one wearing a drool bucket — it’s not what has already happened, it’s what’s going to happen down the line. And right now, most indicators are suggesting that unemployment won’t rebound; housing values won’t rise significantly (if at all) and the U.S. stock market won’t be surging anytime soon.

So it’s a two-edged sword for mortgage rate shoppers. Yes, rates are at historic lows. And yes, housing prices are still at bargain-bin prices, especially in many U.S. states like California, Arizona and Florida. But the pool of available buyers seems to be sitting on the sidelines, or shrinking away altogether. The big elephant in the room is that potential buyers (especially first-time buyers) — even if they qualify for a hard-to-get mortgage loan — are paralyzed with fear that if they buy now, and things get worse economically, they may lose their jobs and will be unable to pay their mortgages.

Economists can’t plug in directly to human emotion, although they try to with data from consumer confidence and consumer spending numbers. But if they could, they’d likely find these days that Americans are in great fear over their personal financial futures, and are in no mood to make any big financial changes in their lives.

Buying a new home definitely falls into that category.

With that backdrop in mind, let’s take a look at the mortgage numbers this week, culled from the BankingMyWay Weekly Mortgage Rate Tracker.

Description           This Week     Last Week

One-Year ARM           3.893%        3.54%

Three-Year ARM        4.205%        4.069%

Five-Year ARM           3.887%        4.004%

15-Year Mortgage     4.235%        4.355%

30-Year Mortgage     4.775%        4.9%

The good news is that if you have some cash on hand, and have a good credit ranking, you’re the boss when it comes to buying a new home. Check out the best rates at BankingMyWay’s Mortgage Rate Search. Week-to-week, it’s your best bet for finding the best mortgage rate deal possible.

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